Automation Without Tears

Literally thousands of traders around the globe use Excel TM to develop and run their mechanical trading models. But until now, the unbridgeable gap has been a bullet-proof way to automate those models for real time simulation and live trading. Gary Stone, Chief Strategy Officer, and Howard Stone, Product/Business head for Tradebook API at Bloomberg Tradebook outline the ideal solution.

While power Excel TM users are commonplace in
financial markets, by no means all of these users are also VBA
programmers. As a result, a large segment of the trading
community has been disenfranchised by the lack of any simple way
to automate mechanical models that they are running in Excel. The
models may spit out entry and exit signals from Excel, but the
process has always still required the trader to manually click to
place the requisite orders. The alternative of hiring a
programmer to automate the model using VBA or another language
immediately runs into the trader/programmer interface where
misunderstandings and errors frequently abound.

Faster competitive productivity

This isn't just a matter of convenience and avoiding programming
costs/misunderstandings. In the financial markets of today, where
doing more with less is not an option, this is also about
productivity, risk management and (ultimately) competitive edge:

• As more traders have access to more computational
firepower, the lifespan of many trading ideas is decreasing
appreciably, as too many traders can easily data mine the same
alpha opportunities. Ten years ago a robust trading model might
capture inefficiencies for several years. Today, an initially
profitable model's performance often starts to decay in a matter
of months, weeks - or even days. That places a premium upon a
trading organisation's ability to maintain a production line of
new models and - once fully tested - deploy them in the market as
quickly as possible.

• When used intelligently, trade automation can beget
greater productivity. The individual who can automate trade
execution and management has additional time in which to research
and develop new trading models. For those traders who don't have
access to a dedicated programming team, Excel has plenty of tools
to facilitate this development process without delving into VBA.
The key is having the time with which to do that, which
automation delivers. As a result, the trading operation as a
whole is able to maximise its available intellectual capital and
work more efficiently.

• While it's common for traders to claim their models are
parameter-less, there's usually at least one parameter somewhere
in the logic that can be optimised. Often the parameter value
that is the most stable and has the most stable adjacent values
in out of sample Excel testing is the one that is selected for
live trading. However, slight changes in market behaviour can
make this a sub-optimal choice in real time. Automation of a
trading model offers an alternative - namely the simultaneous
trading of a range of best performing parameter values
in order to reduce optimisation risk. Workflow considerations
mean that scenario isn't feasible for a human trader, but an
automated Excel solution can make light work of it.

Solution

Grasping these opportunities requires an automation tool that is
transparent to the trader, doesn't involve heavyweight
programming and has an intuitive workflow. The obvious way of
accomplishing this is an Excel component that makes automated
connections behind the scenes between trading models and the
required markets- without the need for the trader to worry about
any of the underlying plumbing. So all he/she has to do is select
a strategy from their list of pre-built trading models, choose
the desired market and position size, click "Run" and allow the
automation component to take care of all the entries and exits.

The trick here is to accomplish this without disrupting the
trader's existing workflow. If a trader is accustomed to running
their mechanical models in an Excel GUI they have already built,
they don't want to have to waste time learning a new layout.
Therefore, any automation component needs to be in a format that
can be dropped transparently into an existing Excel workbook. It
then runs invisibly in the background monitoring the status of
the trader's existing mechanical models and whenever one of those
flags a buy/sell condition it executes the requisite order(s).

A step up

Simple automation from within Excel obviously has a lot to offer
where orders are of a size unlikely to create market impact.
However, for larger orders or illiquid markets, an additional
algorithmic execution element is desirable. So rather than just
specifying a simple buy or sell as the response to a trade
signal, the trader can also select a suitable execution algorithm
to handle the order.

An additional benefit here is that Excel's ability to nest 'if'
statements allows a further level of sophistication. A chain of
'if' statements can be used to automatically choose the most
appropriate execution algorithm for a particular trading signal.
For example: "If a trading model A flags an order for market B
before C time of day and the order size is less than D shares,
use execution Algo X - otherwise use Algo Y".

Segregation and overlay

In the context of trade automation, Excel's ability to run
multiple instances of itself presents further opportunities. For
example, trading models for individual market types (such as
equities, futures or FX) can be run in separate Excel instances.

From a trader's perspective, this is ergonomically easier than
having to flip among different workbooks or worksheets in the
same single instance of Excel in order to monitor activity. A
further advantage is that a separate instance of Excel can be run
that handles just risk management overlay by monitoring the other
instances.

Are you sure about that?

A potential inflexibility with automating mechanical trading
models in Excel relates to deciding whether a condition can be
true instantaneously (i.e. the models reacts to each new data
tick) or whether it only responds to values at the close of a
predefined bar length (such as 5 or 10 minutes).

Real life isn't quite so convenient - a single blip above a
target level may not offer the signal confirmation a trader
requires, while having to wait for the close of a 10 minute bar
may see the alpha opportunity missed. Therefore there is a need
for any Excel trade automation component to offer time based
confirmation functionality, e.g.: "The long entry condition has
gone from false to true - and has remained true for 35
seconds".

This functionality also allows trade signal strength to be allied
to position size. For example, for each defined unit of time an
entry or exit condition remains true it could be deemed stronger
and an additional number of contracts or shares can be
automatically bought/sold.

Realism

Being able to build and back test trading models in Excel and
then deploy them automatically in live trading is a huge benefit
for any Excel power user. However, it still omits one vital step
- real time simulated (or paper) trading.

The final piece in the Excel trade automation jigsaw is to be
able to conduct this type of simulated trading and then once it
is satisfactorily completed switch immediately into live
production without any re-coding or re-plumbing being required.

Conclusion

Automation of trading models within Excel can deliver value on
multiple levels. In addition to the generic advantages of
productivity, workflow and risk management, the right automation
tool can turn Excel into a complete integrated development,
testing and automated/algorithmic trading environment.

By the way, if you're looking for this tool - it's called
Tradebook Order Builder...

Bloomberg Tradebook is a global agency broker offering advanced
trading algorithms and direct market access to over 60 global
equity, futures, and options markets and 41 currency pairs in
our Foreign Exchange marketplace. Many traders have created
valuation, investment and trading strategy models in various
applications and nourish them the Bloomberg Professional®
service data API. Now, using the same connectivity as
Bloomberg's data API, traders can integrate their strategies
with Bloomberg Tradebook's high performance Order API and
connect their strategies to the electronic execution highway.

Nothing in this document constitutes an offer or a solicitation
of an offer to buy or sell any security or other financial
instrument or constitutes any investment advice or
recommendation of any security or other financial instrument.
BLOOMBERG TRADEBOOK believes that the information herein was
obtained from reliable sources but does not guarantee its
accuracy.

Communicated by Bloomberg Tradebook Europe Limited, registered
in England & Wales No. 3556095, authorized and regulated by
the UK Financial Services Authority No. 187492. This
communication is directed only at persons who have professional
experience in the investments which may be traded over the
systems and certain high net worth organizations. Available in
all countries and is only offered where clearance been
obtained.

BLOOMBERG, BLOOMBERG PROFESSIONAL, BLOOMBERG TRADEBOOK are
trademarks and service marks of Bloomberg Finance L.P.("BFLP"),
a Delaware limited partnership, or its subsidiaries. Bloomberg
Tradebook is provided by a BLP subsidiary, Bloomberg Tradebook
LLC, and its affiliates and is available on the BPS.

Getting it done

Figure 1: Tradebook Order Builder worksheet with a range of
orders in various states

Figure 2: Tradebook Order Builder worksheet with orders in
evaluation state waiting to be triggered by a moving average
trading model